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Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from \(100 million to \)200 million between one year and the next. Assuming that the price of gold increased by 100 percent over the same period, by what numerical amount did Glitter Gulch鈥檚 real output change? If the price of gold had not changed, what would have been the change in Glitter Gulch鈥檚 real output?

Short Answer

Expert verified

If the price of gold increased by 100%, the output would have decreased by half of the initial output.

If the price of gold had not changed, Glitter Gulch鈥檚 real output would have increased by 100%.

Step by step solution

01

Change in real output when price increases by 100%

The total revenue is the product of price per unit and total quantity.

TR = PQ or 100 = PQ

Here, the price has increased 100%, the change in price is P (饾洢P = P),and the change in revenue is $100 million in one year. Therefore, the change in revenue is

100=2PQ.

Divide the initial revenue by the change in the revenue in the following manner:

100100=PQ2PQQQ=2QQ=12Q=0.5Q

This implies that the output has decreased by half of the intial output.

02

Change in real output when the price is constant

The revenue has increased by $100 million without any change in the price (饾洢P= 0).

Therefore, the change in revenue is again the same as 100=PQ.

Divide the initial revenue by the change in the revenue in the following manner:

100100=PQPQQ=Q

This implies that the output has increased by 100%.

Therefore, if the price had not changed, the Glitter Glutch鈥檚 output would have increased by 100%, doubling the total revenue.

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Most popular questions from this chapter

If the demand for a firm鈥檚 output unexpectedly decreases, you would expect its inventory to

a. increase.

b. decrease.

c. remain the same.

d. increase or remain the same, depending on whether or not prices are sticky.

True or False. Because price stickiness matters only in the short run, economists are comfortable using just one macroeconomic model for all situations.

Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can鈥檛 people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other financial institutions play in aiding the economic growth process?

A mathematical approximation called the rule of 70 tells us how long it

will take for something to double in size if it grows at a constant rate. The

doubling time is approximately equal to the number 70 divided by the percentage

rate of growth. Thus, if Panama鈥檚 real GDP per person is growing at 7 percent per

year, it will take about 10 years (= 70/7) to double. Apply the rule of 70 to solve the

following problem: Real GDP per person in Panama in 2017 was about \(15,000

per person, while it was about \)60,000 per person in the United States. If real GDP

per person in Panama grows at the rate of 5 percent per year, about how long will ittake Panama鈥檚 real GDP per person to reach the level that the United States was

at in 2017? (Hint: How many times would Panama鈥檚 2017 real GDP per person

have to double to reach the United States鈥 2017 real GDP per person?)

Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility? Which ones show a great deal of inflexibility over months or years?

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